(Yicai Global) Nov. 5 -- China's central bank unexpectedly cut the interest rate on one-year loans to commercial banks by 5 basis points today. The first adjustment since March last year sent yields on the country's sovereign bonds higher.

The People's Bank of China lent CNY400 billion (USD57 billion) through its medium-term lending facility and set the rate at 3.25 percent, it said in a statement. As of 12.00 p.m. local time, the yield on 10-year treasuries had jumped 0.27 percent, five-year notes 0.13 percent and two-year bills 0.11 percent.

Boosted by recent inflation expectations and risk appetite, bond rates have skyrocketed, resulting in the cancellation of some corporate debt sales. Reducing the MLF rate helps to stabilize bond market operations and effectively supports business financing and the operation of the real economy.

But the cut took the market by surprise for two reasons, according to the fixed-income team at Guotai Junan Securities. It coincided with an upturn in the consumer price index and was the first easing of the benchmark rate since the end of the last rate-cutting cycle.

The CPI rose so swiftly on an annual basis that it stoked expectations of higher inflation after the rapid rise in pork prices in September and last month, even as producer prices have stayed in the negative range, CITIC Securities fixed-income research team said. Structural inflation driven mainly by the cost of pork has done little to rein in China's monetary policy, however, and the PBOC's focus is more on the downward pressure on economic fundamentals and producer price deflation.

The PBOC did not lower the loan prime rate, the new benchmark lending rate, last month, CITIC Securities pointed out. But the LPR is expected to fall between 5 to 10 bps this month as today's easing of the MLF rate will lower the LPR benchmark along with banks' borrowing costs.

Editor: Ben Armour